From non-binding elements to mandatory criteria on rules of origin

11 November 2015

In order to facilitate market access for imports from LDCs, WTO members’ DFQF schemes for LDCs have to rely on simple and transparent preferential RoO. For this to be achieved across the board, preferential RoO have to be based on mandatory criteria. The latter ought to be derived from the elements for preferential RoO that were adopted at the ministerial conference in Bali, Indonesia and subsequently elaborated on by the LDC Group. 

 

The Doha Development Agenda’s work programme places developing countries’ needs and interests at its heart. For Least Developed Countries (LDCs), this means that their participation in the multilateral trading system has to be improved. One way of doing so is to facilitate market access for imports from LDCs through comprehensive Duty-Free Quota-Free (DFQF) schemes. However, market access opportunities offered under these schemes to imports from LDCs will remain elusive unless the preferential Rules of Origins (RoO) underlying these schemes are simple and transparent, taking account of the limitations and restraints faced by LDCs. While the WTO Agreement on RoO, Annex II, sets out a number of rules with respect to preferential RoO, these rules are considered to be insufficient, on their own, to ensure that LDCs enjoy effective market access under DFQF schemes. Therefore, these rules have to be supplemented.

As recently emphasised by the WTO Director General, the next ministerial conference in Nairobi must deliver on development and, in particular, has to achieve clear results in support of LDCs. One such result should be a set of mandatory criteria for preferential RoO that would enable LDCs to seize in an effective manner the market access opportunities offered by WTO members’ DFQF schemes. These mandatory criteria ought to be derived from the elements for preferential RoO that were agreed by the Bali ministerial conference and subsequently elaborated on by the LDC Group.

Elements for preferential rules of origin as per the Bali ministerial decision

The decisions regarding development and LDC issues adopted at the last ministerial conference in Bali, included a decision on preferential RoO. The latter provides for elements that WTO Members “should endeavour” to take into account when drawing up their preferential RoO arrangements applicable to imports from LDCs. These elements are non-binding rather than mandatory, as is clearly indicated by the words “should endeavour” and “guidelines”. But there is a need for mandatory rules that WTO Members have to follow when designing preferential RoO in the framework of their DFQF schemes for imports from LDCs. This is because only mandatory criteria ensure that the preferential RoO of all DFQF schemes put in place by WTO Members are similarly simple and transparent, thereby making it easier for LDCs to comply with those preferential RoO and to benefit from the market access opportunities under the DFQF schemes.

LDC submissions since the Bali ministerial conference

Since the ministerial conference in Bali, the LDC Group has contributed to the discussion over preferential RoO by making three submissions: (i) a submission on the challenges faced by LDCs in complying with preferential RoO under unilateral preference schemes (G/RO/W/148, 28 October 2014); (ii) a submission on elements for a discussion on preferential RoO for LDCs (G/RO/W/154, 17 April 2015); and (iii) a submission on preferential rules of origin under unilateral preference schemes for LDCs (JOB/TNC/53, 24 September 2015).

The first submission of the LDC Group focused on the criterion of ad valorem percentage and proposed to calculate the percentage concerned based on the value of materials used in the production process, by relying either on the value of originating materials or the value of non-originating materials. Moreover, in view of the experiences with existing supply chains the submission suggested that the level of percentage of the value of originating materials should be set at 15 to 25 per cent. Finally, the submission suggested that the required level of percentage be adjusted by the costs for insurance and freight given that many LDCs are landlocked countries or islands.

The second submission of the LDC Group put forward a number of questions to WTO members in relation to the elements on preferential RoO adopted at the Bali ministerial conference. These questions seek to determine whether and to which extent WTO members are prepared to modify their preferential RoO with a view to aligning them with said elements.  

The third submission of the LDC Group seeks to transform the elements for preferential RoO contained in the Bali Ministerial Decision into mandatory criteria and to add some more mandatory criteria.   

Nairobi outcome on preferential RoO for LDCs 

Building on the Bali ministerial decision on preferential RoO and the three submissions made by the LDC Group since then, the ministerial conference in Nairobi should adopt a decision that sets forth mandatory criteria for preferential RoO for LDCs. At a minimum, these mandatory criteria should include the following:

  • Criterion of ad valorem percentage: the percentage should be calculated on the basis of the value of originating or, alternatively, non-originating materials used in the production process; the level of percentage of the value of non-originating material should not be lower than 75 percent; the costs for freight and insurance should be deductible from the value of non-originating materials.    
  • Criterion of change of tariff classification: this criterion should not exclude the use of non-originating materials as long as an article of a different heading or sub-heading was created from such materials in an LDC; the use of non-originating materials from certain headings or sub-headings should not be restricted.   
  • Criterion of specific manufacturing or processing operation: this criterion should not be used in combination with the criterion of change of tariff classification, but an alternative use of both criteria should be permissible; a single transformation requirement should be sufficient for purposes of demonstrating a substantial transformation, for example: the transformation of fabrics into finished garments, the transformation of raw agricultural materials into processed agricultural products, the transformation of parts into finished products in the case of machinery and electronics, and a chemical reaction rule in the case of chemical products.
  • Cumulation: cumulation with the preference-granting country, any other LDC or any other WTO member with which either the preference-receiving LDC or the preference-granting country forms a regional group should be allowed.
  • Documentary requirements: any requirement to provide proof of non-manipulation or any other prescribed form of certification for products shipped from LDCs across other countries should be abolished.
  • Transparency: preferential RoO should be notified to the Committee on RoO which should annually review the notifications and report to the General Council on the compliance of the notified RoO with the mandatory criteria for preferential RoO.

Conclusion

In light of the fact that development is at the heart of the DDA’s work programme, LDCs rightly expect that the ministerial conference in Nairobi adopts a package of meaningful measures that will help them to effectively participate in the multilateral trading system in general and in global value chains in particular. Such a package should include a set of mandatory criteria that WTO members would have to use when designing the preferential RoO of their DFQF market access schemes for imports from LDCs. 

Author: Christian Pitschas, Partner, IDEAS Centre.

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